Is Jubilant FoodWorks (NSE:JUBLFOOD) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Jubilant FoodWorks Limited (NSE:JUBLFOOD) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Jubilant FoodWorks

What Is Jubilant FoodWorks's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Jubilant FoodWorks had debt of ₹1.83b, up from ₹1.20b in one year. But on the other hand it also has ₹3.81b in cash, leading to a ₹1.98b net cash position.

A Look At Jubilant FoodWorks' Liabilities

The latest balance sheet data shows that Jubilant FoodWorks had liabilities of ₹10.3b due within a year, and liabilities of ₹23.2b falling due after that. Offsetting these obligations, it had cash of ₹3.81b as well as receivables valued at ₹298.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹29.3b.

Since publicly traded Jubilant FoodWorks shares are worth a total of ₹315.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jubilant FoodWorks boasts net cash, so it's fair to say it does not have a heavy debt load!

Sadly, Jubilant FoodWorks's EBIT actually dropped 3.4% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jubilant FoodWorks can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jubilant FoodWorks may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Jubilant FoodWorks produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

We could understand if investors are concerned about Jubilant FoodWorks's liabilities, but we can be reassured by the fact it has has net cash of ₹1.98b. And it impressed us with free cash flow of ₹2.3b, being 76% of its EBIT. So we are not troubled with Jubilant FoodWorks's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jubilant FoodWorks's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.